Spec Tech Wreck
The Party Train in High Growth Tech is Losing Steam
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High-growth tech stocks have been on an absolute tear. At least they WERE until the end of November.
There has been tons of blood in the streets as indices like the Goldman Sachs Non-Profitable Tech Basket fell 30% in a matter of weeks.
The poster child of the explosive growth market bull run is ARK Innovation. After returning a monster 149% in 2020, Cathy Woods got rightfully crowned the Queen of the street. However, the flagship ARKK fund is now down ~25% YTD vs. the NASDAQ up 18%.
What happened? Has the market lost steam, is it just a “fed thing”? Does ARKK = growth technology?
This week, in <5 minutes, we’ll cover the unwind of 2020 winners:
Setting the Table 👉Tech Bubble, Housing Crisis, Before Corona
After Corona 👉Where Are We Now?
A Bloody November 👉 Top Casualties
Where Do We Go From Here? 👉 Diamond Hands or Safety Net?
Let’s get started!
1. Setting the Table 👉 Tech Bubble, Housing Crisis, Before Corona
Over the last 20 years, there have really been 3 major lines in the sand: The dot com bubble, the 2008 housing crisis, and Corona.
The dot com bubble (1995-2001) was a great exercise in greed and irrationality. When you have companies without even sightlines to revenue get bid up to massive valuations because they’ve registered a domain name, you have a problem… a big one.
But this was also a problem because there were real companies that were collateral damage in the wreckage. Let’s take Oracle for example.
Oracle hit a peak market cap of $238B in June of 2000. It then took 21 years until just a couple of months ago in September 2021 to retrace to that market cap.
In the years following the tech bubble, investors were rightfully cautious because of the market cap wipeout of not only the fraudsters but also the real revenue-generating businesses.
But then things started to happen. Amazon, Microsoft, and Google would all survive this wreck and start to actually gain momentum based on sustainable business plans built on this thing called the Internet. Facebook was started in 2004 and was a good idea but more importantly - in the right place at the right time. A product of its environment if you will.
Just as all this momentum was started to build, capital markets dried up as everyone stopped “money out” from the ‘08 housing crisis. In times of crisis, correlations move to 1, so everyone pulled out. But what this would set the stage for is one the most massive wealth creations in history: The fed stepping in through Quantative Easing (QE) which would put a lid on interest rates for more than a decade.
Technology companies really came into becoming behemoths as investors went through the whole cycle of doubt, resistance, acceptance, and euphoria. Investors now understood the business model. Highly scalable, high gross margins, and sticky recurring revenue. The stuff of MBA class wet dreams.
Capital was flooding to growth equities because there wasn’t return anywhere else to be found. And there are now growthier equities than tech stocks. A tech-heavy index is the top 100 stocks in the NASDAQ (Ticker QQQ). As the composition shifter to tech stocks post ‘08, we see the up and to the right explosive growth.
Which brings us to today.
Under the Radar
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2. After Corona 👉 Where Are We Now?
2020 was an unprecedented year in so many ways. We all stayed home, played more video games, drank more, and gained weight. Then we started to get paid more to sit on the couch through stimmies than we did to actually go into work, so why bother?
When Corona hit everyone ran for the doors. But just as quickly as they left, they came back in as the S&P posted the second-best year since the tech bubble. So as soon as another disaster comes, what are we best at? You guessed it. Money printer go brr.
As so much money was flooded into the system, it again crowded around technology stocks, but more specifically this time: speculative “technology” stocks.
One of the charts that was circling around in early 2021 was The Goldman Sachs Non-Profitable Tech Basket, which rose 478% since the March 2020 COVID-crisis low.
But this index has struggled for all of 2021. Leading into last week’s panic low, the basket was down almost 30% in the space of a couple of weeks.
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. A Bloody November 👉 Top Casualties
Any time you have these quant or macro driven sell-offs the top casualties are those that trade at high multiples. Since they are typically longer duration assets with cash flows pushed out, the sell-off is magnified. Here is a list of the main culprits that took the elevator down.
4. Where Do We Go From Here? 👉 Diamond Hands or Safety Net?
When we have these violent market moves it brings you back to the table on your analysis. You doubt all the work that you’ve ever done, you cry when you wake up, and it’s an incredibly humbling experience… every time.
But once the panic is over and you go back to your notes, you look at your thesis for investing in these companies in the first place.
The way that I approach these times is that it’s an opportunity to re-up and add new names. A Black Friday of my own. Want to know which stocks I am adding to and new positions I am initiating? Sign-up HERE for my PAID newsletter to find out.
And remember - over the short term, the stock market is a voting machine, but over the long term it’s a weighing machine. Those companies that can hold their own will come out better than the Oracles of the world.
Timing the market is a near-impossible task. That’s why my long-time newsletter readers know you have to have a much longer time horizon. There are times of turmoil and volatility, but when you zoom out, do your work, and trust the process, the trend is up and to the right.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else are we Grittin’ On?
39-YEAR-HIGHS. Consumer prices are at their highest in nearly 4 decades. At least we don't have to call it 'transitory' anymore.
IPO UH-OH. Of the 20 most recent IPOs, 15 ended Tuesday's session below their listing price. A rough end to a record year for IPOs.
NEXT BIG THING? Apple is expected to unveil its plans for smart glasses which will feature augmented reality (AR). The $19 cloth makes more sense now.
SNOOPVERSE LAND SALE. Someone just became Snoop Dogg's (virtual) neighbor in The Sandbox metaverse for the low price of $450k in Ethereum. They definitely get an invite to the next house party, right?
A DEGENERATE'S PARADISE. A money manager has plans for a New York City casino that will feature a crypto trading floor, a landing pad for flying cars, and an eSports arena. Miami's mayor just got an idea.
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